In hindsight, Kinetic Concepts Inc. seems like a natural for a buyout by private equity.
The medical devices maker, which drew an offer Wednesday from a group that includes two Canadian pension plans, throws off a lot of cash to service debt and it has a clean balance sheet that can support more borrowing to juice yields for buyers.
So what Canadian companies fit that mold?
Running a search on Bloomberg for companies in the S&P/TSX composite index that have high free-cash flow yields and relatively low leverage (defined for argument's sake as under 2 times debt to earnings before interest, taxes, depreciation and amortization) pulls up some interesting possibilities.
Four names jump out.
1. CGI Group Inc. The information technology and business information company offers a free cash flow yield of 11 per cent and a balance sheet with debt that's 1.75 times ebitda. It's also in an industry that's drawn private-equity interest in the past. CGI has a market capitalization of $6.1-billion, however, making it a big bite for even a group of bidders.
2. Davis + Henderson. The company, which provides services to financial institutions, has a free cash flow yield of 10 per cent and a balance sheet with debt of 1.75 times Ebitda. The company is perhaps best known for making cheques, but it has expanded into providing all sorts of technology services for financial institutions. And it trades at a low price-earnings multiple of 9.6 times.
3. CCL Industries. The specialty packaging company offers a free cash flow yield of 8.5 per cent and debt of 1.6 times Ebitda. CCL makes things like labels and containers, the sort of steady, under the radar, often underappreciated business that appeals to many private equity buyers.
4. TMX Group Inc. The exchange operator has a free cash flow yield of 9.7 per cent and a balance sheet with debt of 1.24 times ebitda. This one is already the target of a leveraged buyout in the form of the hostile bid from the Maple Group of Canadian banks and financial institutions, which saw an opportunity to most of TMX and lever up the balance sheet to increase returns.
There are some other interesting names near the top of the list, from the airline and forestry industries, but the businesses may be too cyclical.
West Fraser Timber offers a 16 per cent free cash flow yield and a balance sheet with debt that's only 0.7 times Ebitda. Canfor Corp. isn't far behind, with a free cash flow yield approaching 14 per cent and leverage of 0.8 times Ebitda.
The numbers look interesting, but while pension plans and other private buyers have shown an interest in timberlands, the more cyclical business of forest-products production has been less popular.
There's also a couple of airline operators, Transat A.T. and Chorus Aviation, but the same concern about the up and down nature of the business would have a good chance of stopping any debt-financed deal from taking off.